The Bottom Line

As we move past the midpoint of 2015, several fiscal deadlines are fast approaching. Congress is preparing to act on two important Fiscal Speed Bumps in Congress: the pending insolvency of the Highway Trust Fund, and the upcoming deadline for the retroactive renewal of tax extenders. Our updated infographic illustrates these and other Fiscal Speed Bumps ahead.

The U.S. House of Representatives on Wednesday passed the bill extending highway funding through December 18. The transportation package, introduced by House Ways and Means Chairman Paul Ryan (R-WI), replenishes the Highway Trust Fund by $8 billion. To offset the $8 billion cost, the bill includes provisions such as adjusting tax filing deadlines for businesses, extending the current dedication of TSA fees to deficit reduction, increasing reporting requirements for outstanding mortgages, and requiring the value of an estate to be reported the year that it is inherited.

Last week, the Government Accountability Office (GAO) released a new report to Congress on the debt limit, showing that the failure to raise the debt limit in a timely fashion in 2013 had costs for the federal government. The report also contains proposals for reforming the debt limit. The Better Budget Process Initiative (BBPI) released a paper this spring with proposals for debt limit reform that mirror and answer some of GAO's options and concerns.

The debt limit technically returned in March of this year, though “extraordinary measures” that the Treasury can take will delay the ultimate deadline until late fall. As possibly the most disruptive fiscal speed bump facing the country, it’s important to look into ways that the debt limit can be used to bring attention to our unsustainable debt path while limiting unproductive brinksmanship. The GAO report found that the delay in passing an increase in the debt ceiling during the 2013 government shutdown very much concerned investors. These concerns translated into some financial firms being unwilling to hold Treasuries with expirations immediately after the end of the Treasury department’s ability to continue “extraordinary measures” (we noted an increase in the one-month Treasury yield at the time). GAO found that this increased borrowing costs for the government by between $38 million and just over $70 million. GAO’s communications with investors indicate those investors are prepared to take similar measures if policymakers drag their feet again this fall.

In addition to the analysis on the increased costs, GAO provided recommendations of policy changes to reduce the damage from a future debt limit debate. The proposals include: linking action on the debt limit to the budget resolution, providing the administration with the authority to increase the debt limit subject to congressional disapproval, and delegating broad authority to the administration to borrow as necessary. In March, our BBPI paper “Improving The Debt Limit” put forward several detailed proposals that were consistent with broad recommendations in the GAO report or were variations on the GAO recommendations.

The Office of Management and Budget (OMB) today released the FY 2016 Mid-Session Review (MSR), which updates the President's budget for new data and assumptions. The MSR shows a very similar picture to the budget's estimate in February, with debt stabilizing at just under 75 percent of the economy for much of the next ten years. The MSR shows 2015-2025 deficits that are very similar ($9 billion higher) to the President's budget, although lower economic growth means that 2025 debt is about 1 percentage point higher than OMB projected in February.

In the MSR, deficits would total $5.8 trillion over the 2016-2025 period, or 2.5 percent of Gross Domestic Product (GDP), and would stabilize at 2.7 percent of GDP for the last five years. Debt would fall slightly from 75.3 percent of GDP in 2015 to 74.6 percent by 2018, where it would remain through 2025. This is in contrast to the February estimate that had debt on a very slight downward path to 73 percent by 2025.

The Chief Actuary for the Center for Medicare and Medicaid Services (CMS) recently released the 2014 Medicaid Actuarial Report forecasting Medicaid enrollment and spending for the next ten years. The report contains some good news, showing lower spending projections than last year's, but also some signs that the program may increasingly strain federal and state budgets in the coming years.

Medicaid spending is projected to grow on average by 6.2 percent per year over the next ten years, increasing total spending from $499 billion in 2014 to $835 billion by 2023. This growth rate is somewhat faster than GDP growth, thereby increasing spending as a share of GDP from 2.9 percent in 2014 to 3.1 percent in 2023. Enrollment is projected to grow by about 2 percent per year, meaning that per-person costs will rise by about 4 percent per year, roughly in line with the actuaries' projections of GDP per capita growth. Enrollment growth is concentrated more in the early years of the projection window as the Medicaid expansion covers more and more people.

The federal government will account for 60 percent of this spending each year, up from the historical share of about 57 percent that prevailed prior to the Affordable Care Act (ACA). Federal Medicaid spending is projected to grow from $300 billion in 2014 to $497 billion by 2023. The $3.9 trillion of total spending projected over the 2014-2023 period is $237 billion less than the Congressional Budget Office (CBO) expects for the same time period.

Here at CRFB we spend a lot of time reviewing responsible options to offset the cost of new bills and have provided many to lawmakers. So when current Ways & Means Chairman Paul Ryan (R-WI) announced an $8 billion transportation package to extend the life of the Highway Trust Fund until the end of the year, we were pleased that almost all of the savings ideas came from options we had previously identified as areas of consensus between former Ways & Means Chairman Camp's Tax Reform Act of 2014 and the President's Budget.

Many of the tax compliance ideas, dealing with mortgages, filing dates, an estate tax loophole, and a statute of limitations, were included in both plans. Three of the four were also in our PREP Plan as a way to pay for the tax extenders at the end of last year. And the single largest source of funds, to continue devoting some of current TSA fees to deficit reduction, had not been included in any previous legislation (that we are aware of) before we suggested it in The Road to Sustainable Highway Spending.

The House Ways & Means Committee held a hearing last week to investigate possible changes to the Social Security Disability Insurance (SSDI) program that would encourage beneficiaries to return to work when possible. The hearing, the first on the program for the full committee since 2008, launches a larger conversation on possible improvements to SSDI as depletion of the trust fund's reserves approaches at the end of 2016.

As one of the fiscal speed bumps lawmakers must address in the 114th Congress, the impending insolvency of the SSDI trust fund presents both a need to secure additional program funding and an opportunity to make improvements to better serve the disability community and taxpayers. Some experts argue, and survey results have shown, that some SSDI beneficiaries wish to return to the workforce but are hesitant to do so because of the complexities and potential loss of benefits if they do.

The Center for Medicare and Medicaid Innovation (CMMI) continues to push forward important delivery system reforms, last week announcing a new initiative -- the Comprehensive Care for Joint Replacement (CCJR) Model -- to bundle payments for hip and knee replacements. The proposed rule will be published in the Federal Register today.

Hospitals in 75 geographic areas would receive a single payment for the joint replacement surgery and 90 days of care thereafter (rather than individual payments for each service involved, hence the term "bundled") and would be eligible for financial bonuses if they are able to reduce costs while meeting quality metrics. Some of the specifications are similar to CMMI's previous iteration -- the Bundled Payments for Care Improvement (BPCI) initiative -- but the key difference is that CCJR is mandatory in those 75 geographic areas.

CCJR would be tested over a five-year period starting in 2016 and would charge hospitals with trying to limit the spending associated with the joint replacement surgery and follow-up. The hospital is being asked to bear the financial risk because they are best suited to coordinate a patient's care and because most of the variation in costs today occurs during post-acute care (after the initial surgery). Presumably, financial and quality incentives will place a much higher onus than exists today on hospitals to tailor the most appropriate recovery plan for their patients and better manage their care.

Given the difficulties voluntary CMMI initiatives can have in producing significant savings and fostering innovation over time, the mandatory nature here is vital. By making the CCJR mandatory, CMMI will also gain valuable knowledge about the effectiveness of bundled payments in Medicare.

Knee and hip replacements make a good first target because, as the Centers for Medicare and Medicaid Services (CMS) notes, hospitalizations for joint replacement surgeries are expensive -- costing Medicare $7 billion in 2013 -- and the cost per episode differed vastly from $16,500 to $33,000.

In order to receive SSDI benefits, workers with disabilities must demonstrate that they fulfilled the work requirements and have an impairment (or combination of impairments) that is expected to prevent them from engaging in substantial work for at least a year (or result in death). Individuals apply at local Social Security Administration (SSA) field offices, but the initial disability decisions are made by state agencies, known as Disability Determination Services (DDS). To decide if an individual is “disabled” as defined in Social Security law, DDS uses a 5-step sequential evaluation process, detailed in Figure 1.

Congressional Budget Office (CBO) Director Keith Hall testified Thursday before the Senate Homeland Security & Government Affairs Committee in a hearing titled "Understanding America’s Long-Term Fiscal Picture." Senators questioned Hall on the implications of debt and deficit projections for the U.S. economy, the scale of the adjustment needed to put the debt on a sustainable path, and what the Greek debt crisis means for the U.S.

In his testimony, Hall reiterated many of the main points made in CBO’s Long-Term Budget Outlook and in his testimony to the Senate Budget Committee last month. In particular, he noted that high levels of debt will weigh on economic growth through crowding out of private investment, reduce the ability of the government to respond to unexpected events, and increase the risk of a fiscal crisis.

When asked if there were any lessons that the U.S. should take away from the Greek situation, Hall noted that Greece’s experience showed that it was “very difficult to make fiscal policy decisions under the pressure of a financial crisis” and that it should highlight to U.S. policymakers the benefits of acting sooner rather than later. These benefits are explained in our recent blog post.

Note: Last updated 7/27/15. The status table below will be updated regularly throughout the FY 2016 appropriations process.

The appropriations process is in full swing on Capitol Hill. The budget conference agreement laying out the topline spending levels, known as 302(a) allocations, passed the House by a vote of 226-197, and passed the Senate by a vote of 51-48. As we noted, the House has already moved to floor consideration of some bills, while the Senate is holding hearings and markups. As we did last year, we'll be tracking the bills as they move from committee to the House and Senate floor, and on to the President's desk.

The table below shows the status of each appropriations bill. To learn more about the appropriations process, read our report: Appropriations 101.

Peter G. Peterson is the founder of the Pete G. Peterson Foundation and is a member of the Committee for a Responsible Federal Budget. He wrote a commentarythat appeared on the opinion page of USA TODAY. It is reposted below.

Three weeks from the deadline to deal with highway funding, a new report commissioned by the McGraw Hill Financial Global Institute gives Congress some sense of the economic stakes of their decisions. The report, written by American Action Forum President Doug Holtz-Eakin and Progressive Policy Institute Chief Economic Strategist Michael Mandel, looks to apply dynamic scoring to increased infrastructure spending. Although much of the focus on the dynamic scoring rule included in the Congressional budget was on its use to analyze tax changes, they argue that it is also important to extend the requirement to legislation that funds the nation's infrastructure projects.

As the authors note, part of the reason why there is less discussion of infrastructure spending in connection with dynamic scoring is because the rule only applies to changes in mandatory spending and revenue, whereas infrastructure spending is discretionary, so even a large increase in spending wouldn't automatically trigger a dynamic score. In addition, many bills have been small, particularly those involving highway spending since they have generally maintained spending at around current levels. But Congressional leadership has discretion to compel CBO to dynamically score a bill, and the authors argue the agency should do so for infrastructure bills.

Holtz-Eakin and Mandel produce their own 20-year dynamic estimate of the cost of increased infrastructure spending, which accounts for the impact on both short-term aggregate demand and longer-term effects on productivity. Based on estimates from CBO and the IMF, they conservatively assume a short-term multiplier of 0.8 -- $1 of spending increases GDP by $0.8 -- during slack economic conditions and a lower one as the economy approaches full employment. For longer-term effects, they assume a productivity elasticity of 0.03, meaning that a 1 percent increase in spending increases productivity by 0.03 percent per year.

The Greek saga took another turn last week as the second bailout from the Eurozone countries approved in 2012 expired on June 30, leading to Greece missing a payment to the International Monetary Fund (IMF) and being put in arrears. A referendum asking Greek voters whether they wanted to approve new terms for financial assistance offered by the European creditors subsequently failed, strengthening the hand of the Syriza-led government but also leaving Greece's status in the euro up in the air. The government is putting together another proposal to its creditors to be reviewed later this week.

First, here's how Greece got to this point.

Background

The Greek drama started in late 2009 when the new government headed by George Papandreou revealed that the 2009 deficit would be much larger than previously expected at a time when debt already exceeded the size of the Greek economy. Fears of an inability to afford and service its debt led interest rates to rise, with the ten-year rate doubling from 4.5 percent to 9 percent just between late-2009 and mid-2010.

After receiving several credit rating downgrades, the Greek government enacted austerity measures targeting a deficit of 3 percent of GDP in 2013, down from 15 percent in 2009, in exchange for a 110 billion euro rescue package. The austerity, though, hurt the economy as real GDP shrunk by 5 percent in 2010 and 9 percent in 2011, according to the IMF, and the unemployment rate shot up from 10 percent in late 2009 to over 25 percent by 2012. All the while, interest rates continued to rise dramatically, with the ten-year rate peaking at around 30 percent in early 2012. A second bailout around that time plus a pledge from European Central Bank (ECB) President Mario Draghi to do "whatever it takes" to preserve the euro quelled fiscal concerns for the time being, but Greece's economy remained in terrible shape.

In January of this year, the left-wing party Syriza and party leader Alexis Tsipras won the legislative election and took control of parliament on an anti-austerity platform, creating uncertainty about the path that the new government would take. The second bailout, which was set to expire in February, was extended through the end of June.

The Senate Finance Committee has been working all year in five bipartisan working groups on tax reform, and today they have reports to show for it. Of particular interest is the international tax reform working group's report, since there has been some potential common ground emerging between the two parties, and this reform has been linked to a Highway Trust Fund solution. We will summarize the other four reports in a later post.

For background, the federal government taxes U.S. multinational corporations on their foreign income with a deferral system. This means that "active" foreign income is generally only taxed when it is repatriated to the U.S., while "passive" income – basically financial income that is highly fungible and mobile – is taxed immediately. The companies get foreign tax credits for the taxes they pay to foreign governments to prevent double-taxation.

The working group's framework discusses five issues in international tax reform:

Over the past few weeks, we have been posting in-depth analysis of the Congressional Budget Office’s (CBO) Long-Term Outlook. In its supplemental data, CBO shows that health care spending is a major driver of our projected spending over the long term. By 2060, federal health care spending as a share of the economy will double from its current level to 10 percent of GDP. The major health care spending programs include Medicare, Medicaid, health exchange subsidies, and the Children's Health Insurance Program. Other sources of growth in spending include Social Security and interest costs. The following graph shows the drivers of our spending growth (excluding interest). Note that interest spending is actually the fastest growing part of the budget.

The IMF has released new research showing that fiscal reforms enhance economic growth. These findings are broadly consistent with other analysis of this topic, including work from the Congressional Budget Office (CBO) that showed that a sensible deficit reduction plan could boost per-person income in 2040 by $4,000 relative to our current course.

Examining past reform episodes in nine countries, the IMF report finds that economic growth was around 0.75 percentage points higher per year on average in the decade following the reforms for advanced economies, and 2.5 percentage points higher per year for emerging market or low-income countries. Separate analysis of growth acceleration episodes confirms this positive impact, with higher growth more likely to occur following fiscal reform. Packages that included both revenue and spending reforms lead to faster growth in 60 percent of the cases examined and were also more likely to spur growth than ones that changed only one or the other.

To ameliorate some concerns with the original bill, a revised version of H.R. 6, or the 21st Century Cures Act, was recently released, aiming to accelerate the development of medical cures by, among other things, increasing funding to the National Institutes of Health and creating a Cures Innovation Fund. The House of Represenatatives is likely to take up the revised version of the legislation later this week.

Last month, we discussed the prior iteration of the bill, detailing how the anticipated $12 billion gross cost was offset by several changes, including some real health savings, the selling of 64 million barrels of oil from the Strategic Petroleum Reserve (SPR), and a timing shift involving Medicare's prescription drug benefit -- Part D. However, there were a few concerns with the bill that have caused it be revised.

The first concern was technical: the Congressional Budget Office's (CBO) score of the bill scored the $10.55 billion designated for the NIH and Cures Innovation Funds as appropriations subject to the discretionary spending limits, contrary to lawmakers' intent. This meant that the additional money would simply crowd out other spending under the cap and that many of the offsets designated for the bill were unnecessary (it already reduced deficits by $12 billion), since they are only needed to offset mandatory spending.

The new bill lessens this new funding by $1.25 billion and clarifies that it should be classified as mandatory appropriations, thus adding $9.2 billion of costs to the bill on paper (although this is really a $1.25 billion reduction in costs from their original intent).

On Tuesday, Sen. James Lankford (R-OK) wrote an op-ed in The Hill advocating for meaningful reform to the Social Security Disability Insurance (SSDI) program. The SSDI trust fund's pending insolvency is one of the Fiscal Speed Bumps that Congress will need to address before the end of the legislative session next year, and many see it as an opportunity to put in place changes that will extend the trust fund's solvency in perpetuity.

Lankford noted:

The Social Security Disability Insurance Trust Fund is sustained by payroll taxes on each check. When the trust fund goes insolvent next year, 14 million disabled Americans will face a drastic cut to benefits of almost 20 percent or the fund will have to be replenished with higher taxes.

Some have suggested to fix the insolvency that Congress should only shift funds from Social Security or the Old-Age and Survivors Insurance Trust Fund, which would reduce those programs’ solvency as well. Clearly, shifting funds does not address the root of the problem.

It is time for a major overhaul of the disability system and a renewed focus on the disabled. Before the SSDI program goes insolvent in 2016, there are things that Congress and the Social Security Administration can do to protect the program for those who rely on it and the taxpayers who fund it.

According to the Congressional Budget Office (CBO), rising debt levels could reduce projected annual income by between $2,000 and $6,000 per person by 2040, while a deficit reduction plan could instead increase income levels and reduce interest rates on government debt, an effect that would flow through to mortgages and other loans.

This is just one of many economic findings included in CBO's latest Long-Term Budget Outlook, which shows very clearly that rising debt could be detrimental to the American economy.

While CBO's standard long-term projections are based on "benchmark" economic projections which generally assume no major changes in fiscal policy, they also warn of the limits of such projections. As CBO explains, rising debt can havefeedback effects by crowding out private investment in favor of public debt and ultimately slowing economic growth.

CBO's report quantifies these effects and their effect on debt. Under current law – where debt grows from about three-quarters of the size of the economy today to equal to the size of the economy by 2040 – CBO estimates GNP would be 2 percent smaller by 2040. If lawmakers continue to add to the debt in many of the ways that they haverecentlyas in the Alternative Fiscal Scenario (AFS) – and debt reaches 156 percent of GDP by 2040 – CBO estimates the economy would shrink by an additional 5 percent, or roughly 7 percent in total. On the other hand, a $4 trillion deficit reduction would increase the size of the economy by 5 percent as compared to the Extended Baseline and 3 percent above the benchmark level.

The Tax Policy Center (TPC) recently released a primer on carbon taxes. The report outlines how the construction of a carbon tax matters for its efficacy in reducing emissions, overall impact on economic well-being, and distributional impact. Particular focus is given to analyzing the potential winners and losers under a carbon pricing regime and how the revenue generated by the tax can be used to alter these effects. Conveniently, the report comes on the heels of a new carbon tax bill (described below) and new research released by CBO, which forecasts hurricane damage to rise five-fold by 2075 as a result of climate change.